Bookkeeping plays a critical role in the financial management of construction companies. Due to the industry's complexity, from job costing to managing contracts, bookkeeping in construction requires specialized approaches. This guide covers the fundamentals, best practices, and unique challenges construction companies face when managing their books.

Unlike many other industries, construction bookkeeping is project-based. Every contract or job is treated as a distinct entity that requires individualized tracking of income, expenses, and profit margins. This project-centric approach demands greater accuracy and detail to ensure that businesses maintain profitability, comply with tax laws, and make informed business decisions.

Key differences in construction bookkeeping include:
Job costing: Tracking the cost of labor, materials, and overhead on a per-project basis.
Revenue recognition: Construction companies often recognize revenue differently from other industries. Depending on the contract type, this could include percentage-of-completion or completed-contract methods.
Retainage: A portion of the payment may be held back until the project is completed to the client’s satisfaction, creating deferred revenue for the contractor.

Job Costing
Job costing is at the heart of construction bookkeeping. Every project must have its own set of accounts to track:
Labor: Time spent by workers, which may include direct employees or subcontractors.
Materials: Every material purchased for a project must be logged and linked to the job.
Overhead: Expenses that aren't directly billable to a job but necessary for completion, like transportation or equipment rentals.

Revenue Recognition
Revenue recognition in construction follows specific accounting standards under ASC 606 (Revenue from Contracts with Customers):
Percentage of Completion Method (PCM): Revenue is recognized as the project progresses, typically based on costs incurred or milestones reached.
Completed Contract Method (CCM): Revenue is only recognized once the project is finished, which is common for short-term or smaller projects.

Accounts Receivable (AR) and Accounts Payable (AP)
Keeping track of AR and AP is crucial for ensuring cash flow remains positive. Construction businesses must carefully manage invoices, including progress billing and retainage withholding, and ensure vendors and suppliers are paid on time to avoid disruptions in projects. Read more about how Followup CRM connects with AR module of most construction ERPs.

Payroll Management
Labor costs in construction are a large part of job expenses. Bookkeeping must account for:
Union vs. Non-union Labor: Union contracts may include pension contributions, healthcare benefits, and other costs that require separate tracking.
Prevailing Wages: Government projects often require contractors to pay specific wages, which must be tracked and reported accurately.

Project-Based Financial Statements
Unlike general business financials, construction companies need financial statements by project to understand profitability. These include job profitability reports, work-in-progress reports (WIP), and backlogs of contracts in hand.

Implement Job Costing Software
Using construction-specific accounting software helps to streamline job costing and ensures accurate tracking of labor, materials, and overhead on a project-by-project basis.

Separate Personal and Business Finances
It's important for construction business owners to keep personal and business accounts separate. This helps with tax reporting, reduces confusion, and makes it easier to assess the true financial health of the company.

Regular Reconciliation of Accounts
Periodic reconciliation ensures that all transactions are captured correctly. Comparing bank statements, credit card transactions, and financial reports monthly helps prevent errors and ensures timely correction of discrepancies.

Automate Invoicing and Payment Tracking
Automating invoicing and payment follow-up minimizes errors, ensures timely payments, and reduces the risk of disputes over billing.

Stay Compliant with Tax Regulations
Construction companies must navigate various tax rules, including sales tax on materials, payroll tax compliance, and accurate reporting of 1099s for subcontractors. Working with a tax professional who understands the construction industry is highly recommended.

Fluctuating Cash Flow
Construction companies often face inconsistent cash flow due to the timing of payments, retainage, and the long duration of projects. Proper cash flow management is vital to avoid operational disruptions.

Tracking Multiple Jobs Simultaneously
When managing several projects at once, it's easy to lose track of individual job costs. Accurate bookkeeping ensures each project’s profitability is easily measured and tracked over time.

Change Orders
Change orders, or adjustments to the original project scope, can complicate bookkeeping. These need to be properly documented and tracked in job cost reports to ensure accurate profitability analysis.

Retainage Accounting
Retainage is common in construction, where a portion of payment is withheld until project completion. This creates a deferred income scenario that needs proper bookkeeping, as it can affect cash flow and revenue reporting.

To address the complexities of construction bookkeeping, specialized accounting software is a must. When evaluating software, construction companies should look for the following features:
Integrated job costing: Allows real-time tracking of costs per job, ensuring that budgets are maintained.
Progress billing: Supports invoicing based on project milestones or percentage of completion.
Retainage tracking: Keeps track of withheld payments to ensure they are released and booked when the project is completed.
Payroll management: Manages both union and non-union labor, calculates prevailing wages, and integrates with job costing.
WIP Reporting: Provides detailed work-in-progress reports to help track the progress and profitability of each job.

Check out our guide to choosing the best construction accounting software depending on the the size, scale etc of your business.

Managing bookkeeping in-house may be feasible for smaller construction firms but can become overwhelming as the business grows. Here are the pros and cons of outsourcing bookkeeping tasks versus keeping them in-house:

Outsourcing:
Pros: Access to experienced professionals who understand industry-specific challenges; scalable services as your company grows; reduced risk of errors.
Cons: Less control over day-to-day bookkeeping activities; may have higher costs for small businesses.

In-House:
Pros: Full control over your financial processes; employees are directly accountable for the company's books.
Cons: Requires hiring or training staff with specialized construction bookkeeping knowledge; can be time-consuming.

Managing bookkeeping in-house may be feasible for smaller construction firms but can become overwhelming as the business grows. Here are the pros and cons of outsourcing bookkeeping tasks versus keeping them in-house:

Outsourcing:
Pros: Access to experienced professionals who understand industry-specific challenges; scalable services as your company grows; reduced risk of errors.
Cons: Less control over day-to-day bookkeeping activities; may have higher costs for small businesses.

In-House:
Pros: Full control over your financial processes; employees are directly accountable for the company's books.
Cons: Requires hiring or training staff with specialized construction bookkeeping knowledge; can be time-consuming.

Bookkeeping for construction companies is complex but essential for financial health and compliance. By understanding the basics of job costing, revenue recognition, and the specific challenges the construction industry faces, businesses can ensure their financial operations run smoothly. Leveraging specialized bookkeeping practices and construction accounting software or ERPs helps construction firms track costs more efficiently, optimize profits, and meet the demands of a competitive industry.

Whether done in-house or outsourced, effective bookkeeping is crucial for the long-term success of any construction business. Read more about choosing the right construction accounting software.